hot topics treasury seminar - pwc · pdf file18.06.2015 · pwc hot topics treasury...
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PwC
Hot TopicsTreasurySeminar
Supplier financing
18 June, 2015 Discover and unlockyour potential …
1
June 2015
Program
1. A WCM Opportunity
2. The Concept
3. Business Case
4. Platforms
5. P2P Process Optimisation
6. Discussion
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A Working Capital Management Opportunity
1
Setting the scene
Scarcity of liquidity
Liquidity is cheap, but scarce and banks are
deleveraging
• Working capital management remains to the top of the corporate agenda
• Managers seeking ways to unlock funds trapped in the Cash Conversion Cycle
• EU Late Payment Directive
• Banks focusing more on flow and trade products
Stricter regulations Economic pressure
Basel III and regulation of FI’s are constraining
capital and lending
Economic environment
pressures profitability
Credit terms
Long supplier credit terms is a hot topic
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Traditional financing of the supply chain
“a Zero-sum game?”
Wants shorterpayment terms
(low A/R)
Any sale is a gift until payment is
received …
Buyer
Wants longerpayment terms
(high A/P)
Any payment is a donation until the goods are received
…
Suppliers finance their customers based on their own credit: Is this the only way to finance this supply chain?
Supplier finances customer
with e.g., 60 days credit
BuyerSupplierAccounts Receivable = Accounts Payable
Credit Rating / Credit Standing
Access to Funding
Cost of carrying Liquidity
Cost of Funding
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Supplier finance solutions
Equity Debt Other contractual agreements
• Take-over
• Joint venture
• Minority interest
• Loans
• Advance payments
• Reverse factoring
• Vendor leasing
• Convertibles
• Profit/revenue sharing
• Risk sharing
• Buyer managed inventory
• Vendor managed inventory
• Dynamic discounting
• Options & futures
A definition
“Financial arrangements in the form of debt, equity or other contractual agreements used in collaboration by at least two supply chain partners (buyer and seller) and facilitated by the focal company with the aim to improve the overall financial performance and / or the stability of the supply chain”
Supplier finance is often referred to as reversed factoring or approved payable finance
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Supplier Finance: The concept
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Buyer
Financier
Supply Chain Financing (SCF) as a win-win solution
Bank purchases approved invoices, taking only short-term Buyer risk
Financed by SupplierCurrent
30 days terms
Suppllier sells invoice and is paid
25 days early
Buyer is able to extend
payment terms beyond 30 days
SCF new
60 days terms
Financed by
Supplier
EXAMPLE
Financed by Bank
60305
SCF gives efficient financing of the value chain, where both parties can reduce working capital against lower total costs
Supplier
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Supplier financing – the basics
Buyer Supplier
1. Commercial Contract, including terms and conditions
Financier
2. Funding Contract
5. Discounting the invoice
6. Payment of invoice at due date
3. Delivery of goods & issue of invoice
4. “OK2PAY”
Generic Trade Credit Terms
• Credit Rating discrepancy
between Buyer and Supplier
• Sourcing Strategy
• Onboarding Suppliers
• Transfer of title to Financier
• Non-mandatory participation
• No recourse on Supplier
• No credit enhancements from
Buyer• Efficient A/P invoice processing
• Internal system configuration
• Internal workflow (3way match)
• Alternative Interfaces
Key considerations:• Funding Strategy (buyer & supplier)
• Securing the supply line
• Recurring business
• Balance sheet management
(incl. accounting treatment)
Key Success Factors:• Credit rating difference
• Operational excellence
• Trust between Buyer and Supplier
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Business case
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Supplier financing – distributing the benefit
Buyer Supplier
Financier
• Opportunity to extending and to
harmonise A/P credit term
• Improving Free Cash-flow and WACC
• Reduction in FTE AP
• Secure Supplier relationship
• Less currency risk / hedging
• Collateralized finance ( risk reduction)
• Higher return on risk weighted assets
• Access to Suppliers via Buyer
• Opportunity to reduce AR/DSO
• Access to (additional and flexible) credit and liquidity
• Grip on cash inflow and forecast ability
• Secure Buyer relationship
• Lower financing cost (credit rating buyer)
• Reduction in FTE AR
Supply Line Continuity
Business Relationship
Trade & Credit Margin
Tax Credits?
Nature of program defines where
benefit surfaces in financial
statements of participants
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Buyer
SCF; Balance Sheet Management & Cost of Capital
Equity
LT Funding
Cash
A/R
Inventory
LT Assets
A/P
ST Funding
• Accounting
• DPO
• Free Cashflow
• Other fin.ratio’s
• WACC
Equity
LT Funding
Cash
A/R
Inventory
LT Assets
A/P
ST Funding
Supplier
• DSO
• Return on Assets
• Balance Sheet Total
• Savability
• WACC
Ret
urn
on
Inv
estm
ent
leverage impact: tangent is measure of change in WACC
Asset Value locked
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SCF program benefits - important to focus on key attention points
Potential disadvantages & risks?
• Bank risk in case of single bank programmes
• ‘Lock-in’ effect with single provider models
• Risk of reclassification of trade payables as bank loans
• Potential utilization of the credit lines with the financial institutions
• Risk of legal liability for over financing of suppliers in certain countries in case of supplier bankruptcy
2. Supplier Finance: The Concept
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Platforms
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Platforms
Model Examples (Not all-inclusive) Strengths / Weaknesses
Bank Captive • Citi• ING• Deutsche Bank
Relatively SimpleCost EfficientComplex On-boardingSmall Suppliers Excluded
Non-Bank Captive
• GE Capital• Siemens Financial
Relatively SimpleLimited Reach
Peer to Peer • Receivables Exchange Diversified FundingLow Maturity
Technology Platform
• OB10/Tungsten• Ariba• Tradeshift• Taulia• PrimeRevenue• Pro Quidity• Oxygen (EPD)• Flinqer (EPD)
Often multi-bankAdaptable to large/smallCan be cost efficientVariable maturityVariable network strength
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Platforms
Illustrative example of a technology platform
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P2P process optimisation
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Successful SCF is embedded in an integrated Procure-to-Pay framework
Procure to Pay cash strategy and policy
1. Invoice ProcessOptimization
• Improved invoiceprocess timing
• Earlier confirmationdate
• Improved discrepancymanagement
• Longer SCF financeperiod for suppliers
2. Payment termEnhancement
• Company PtP cashstrategy and approach
• Optimized payment terms period
• Standardized and aligned payment terms
3. Supply Chain FinanceAvailability
• SCF provider• SCF platform• Optimum SCF finance
conditions for suppliers
4. Optimized supplierpayment cycles
• Integrated with PtPCash strategy
• Aligned to standard payment terms
• Optimizing both DPO and actual cash days
Metrics and KPIs
SCF is an effective tool to support the payment term extension program, but it needs to be considered within the end-to-end P-to-P process cycle
Buyer
Invoice date
Confirmation Date “OK2PAY”
Invoice Due Date
Targeted Due Date
Invoice Payment
DateInitial Payment
TermTargeted Payment
Term
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Buyer
Operational excellence required from Buyer
• “OK2PAY” clearly identifiable workflow step at 3-way match (order, goods receipt, invoice), confirming liability towards Suppliers as per invoice
• The closer to invoice date the more benefit Supplier can get from SF-program
• Purchasing Company
• Centralisation and tax consideration vs. application support
• Payment discipline is expected by Financier
Application landscape supporting invoice and payment processing is key success factor
SF does fit very well with the concept of financial share services
Invoice date
Confirmation Date “OK2PAY”
Invoice Due Date
Targeted Due Date
Invoice Payment
DateInitial Payment
TermTargeted Payment
Term
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Supplier Finance Readiness
Example bottlenecks:
1. Inefficiencies in the roll out to suppliers (e.g. onboarding of selected suppliers)
2. Poor quality of Purchase Orders and ‘goods receipt’ process (resulting in invoice approval delays)
3. Long approval time for invoice
… and many other bottlenecks can occur due to a non optimal process
Source to Contract Purchase to Pay Process Treasury
Contract & Supplier
Management
Strategic Sourcing
Request & Order
Goods & Services
Receive Goods or Services
Receive and process invoice
Process payment
and closingCash Mgmt.
1
= place of pain point
= place of root cause
SC Finance issues often have root causes upward in the chain
2 3
A Supplier Finance Readiness check is recommended as several bottlenecks can hamper the source-to-pay process prior to actual payment.
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Discussions
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Key take away & discussion
Bas RebelPhone number: +31 88 792 3824Mobile: +31 6 45874974E-mail: [email protected]
Supplier Finance:
Can create substantial benefit across the supply chain
Can be an alternative for bank credit lines for both Buyer & Supplier
Fits within long term procurement strategy based on partnership
Requires operational excellence of buyer
Collaboration Treasury & Procurement
Financial shared services
Danny SiemesPhone number: +31 88 792 4264Mobile: +31 6 30245711E-mail: [email protected]
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Appendix
7
Accounting Treatment: een grijs gebied
• Voor de beoordeling van de classificatie
van de schuld zal de economische realiteit
beoordeeld moeten worden
• Voor classificatie als handelsschuld is het
daarom belangrijk dat de afnemer
juridisch een schuld houdt aan de
leverancier en dat de schuld aan de
leverancier dus niet teniet wordt gedaan,
maar blijft bestaan
• De bank heeft dan feitelijk een voorschot
betaald aan de leverancier (i.e. in feite
financiering aan leverancier)
Factoren die door de afnemer (i.e. aanbieder van het SCF programma) kunnen gebruikt als onderbouwing van de stelling dat de financiering door de bank classificeert als een handelsschuld aan de bank:
• De betalingstermijn wordt niet verlengd als gevolg van het SCF programma
• Het is een vrije keuze van een leverancier om al dan niet te participeren
• Het te betalen bedrag door afnemer is niet gewijzigd
• De voorwaarden voor betaling door afnemer blijven gelijk
• De financieringslasten worden volledig gedragen door de leverancier
• Er wordt geen kick-back gegeven door de bank aan afnemer
• Afnemer is niet of zeer beperkt betrokken in de totstandkoming van de relatie tussen de bank en de leveranciers
• De leveranciers en de bank onderhandelen een marktconform contract (prijs en andere voorwaarden) voor de betaling
• Afnemer blijft verantwoordelijk voor controle van de factuur, prijsafspraken, creditnota’s en dergelijke
• De bank is een slechts een agent voor de betaling, afnemer houdt controle over de betaling van haar schuld
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